Clio the cat, ? July 1997 - 1 May 2016
Economic solutions: How to go from financialized neoliberalism to a productive, sustainable economy
Transcript (of Hudson)
MICHAEL HUDSON: Well, the key word that you used was system. And a system has many dimensions of the solutions. And so all the points that you mentioned are various parts of the overall system that we're trying to put together. There's not one single reform that can cure the problem.
And the problem basically is that most money is issued by commercial banks, not by the government. And bank credit, as we've discussed in the last episode, is largely created for the wrong things. It's created against housing to inflate housing prices. It's granted for corporate takeovers.
One thing bank credit is not issued for is to build new factories and to employ labor and to increase economic growth. That's the job of the government when the government treasury creates money to spend into the economy for functions that are supposed to serve society and serve economic growth.
But when a government lends money, it's for very different reasons. It's for the real economy. And when banks lend money, it's for the financial overhead economy. And that's why we would like to see all money created basically by the Treasury.
And of course, if the loans are lent out by commercial banks, if they are the agents of the government, they will get credit and the ability to issue credit from the Treasury, but really not from the Federal Reserve.
The Federal Reserve was created to get rid of the Treasury in 1913. The Treasury wasn't even allowed on the Federal Reserve. Most people don't realize that before there was a Federal Reserve here, all of the functions that are now done by the Fed were created by the Treasury.
And that's the same in most countries. Every country that has a central bank is to essentially take power away from the government to spend money into the economy, to insist that the government should run a balance and not create money and force everybody to depend on bank credit for whatever they need.
And the bank credit, as we've described before, is not very helpful. And so money is created by running into debt for a commercial bank.
We want money created by the Treasury where it does not involve this kind of debt. There are many ways of doing it.
If the commercial banks acted like savings banks, 100 percent reserve, then they would essentially be reliant on the government to create their credit for the kind of thing that the treasury creates credit for, for growth.
And so if you look at the solution, what is the problem that you're trying to solve? The problem is to minimize the debt overhead and to maximize economic growth.
MICHAEL HUDSON: Well, you pointed to another product of the banks, and that's junk economics, pretending that the bank credit fuels economic growth and that it does so in a way that promotes stability.
But what it really does is financial parasitism, a debt overhead. You mentioned cash, and that you want to replace the bank credit with cash. What you mean, basically, is like the paper money in your pocket.
The government would spend the equivalent of paper money by any kind of government-created credit through the Treasury or through Treasury banks, or even by commercial banks acting like savings banks with the savings coming from the government.
The distinguishing feature of the paper money you have in your pockets that's different from bank credit is the paper money doesn't have to be repaid. Nobody is going to somehow repay your currency and say, I'm going to cash it in. You cash in a $10 bill, you get two $5 bills. But bank credit does have to be paid and comes with interest.
The Treasury credit does not have to entail this huge increasing debt overhead that banks create. That's basically it. It's this debt overhead that actually, as we will discuss later, deflates the economy instead of inflates it.
Bank credit inflates prices for assets, for houses, for stocks and bonds. But it deflates the economy by making people spend more and more of their income on debt service to buy the higher-priced houses or to buy the higher-priced retirement income that the banks bid up.
MICHAEL HUDSON: Well, we were going to, the monetary policy has to go hand in hand with tax policy. It always does, because what gives money its value is its ability to be accepted in payment of taxes.
One of the problems is that banks have led the fight for the last 100 years against progressive taxation. And the result has been that banks have united with the landlords and monopolies to create monopolies to finance an absentee ownership class.
And essentially, instead of following the classical economics that we discussed last time, Adam Smith, and John Stuart Mill, and Marx and the others, instead of making economic rent the basic tax base, land rent, monopoly rent, and financial rent, the banks have led the fight to untax real estate and to untax land because they know, they say, there's all this economic rent, this free lunch, the advantage of price over and above the cost of production, purely empty prices, monopoly prices, when monopolies raise the price of your pharmaceuticals or when stores raise the price of groceries, the banks want all of this monopoly rent for themselves.
And so if the government were to pursue anti-monopoly regulations, or if it was to do the classical policy of taxing the land, then there would be two results: number one, the land tax would not be paid to the banks and not be capitalized into higher housing prices; and number two, the price of housing would be kept down, the price of monopoly goods would be kept down, the price of doing business would be kept down because this excess economic rent, which means empty pricing, which means free lunch, would not be paid to the banks as its major source of income.
And we've talked before, last time, about how 80% of bank loans are mortgage loans. So the whole idea of progressive taxation is not simply taxing incomes higher, it's taxing a particular kind of income higher, bad income, unearned income, economic rent income, not wages, not corporate profits.
The original American income tax in 1913, along with the Federal Reserve, didn't tax wages, and it didn't tax normal small businesses. It taxed the wealthy bankers and the wealthy real estate owners and the monopolists. And the last century has been moving away from this because banks became the mother of trusts, as they used to be called. Banks became the main fighters against any kind of economic progress toward the kind of free markets that the classical economists talked about.
So we're not going to go into value, price, and rent theory here, but if you're looking at the principles of credit reform and bank reform, you want to ask, how does this affect the relationship between the prices that people have to pay and what it actually costs to build a house? The land is provided freely by nature. The locations are more valuable than others. But banks don't create this money, but they get all the rent for it, just like before the 20th century, landlords used to get all the rent for it.
You want to fulfill the fight that the classical economics had to free the economies from the legacy of feudalism. Banks want to restore a kind of feudal economy where the richest people live off rent, rentiers. They live off interest, off landlord rent, and monopoly rent. And you want to get rid of that, and that's what makes socialist economies so much more cost-efficient than finance capitalist economies. There are hardly any industrial economies anymore, except for the socialist economies. And if you want to say, what is a socialist economy? It's an industrial economy free of the rentier class.
MICHAEL HUDSON: Yes. The reality is just the opposite. The deflation is everywhere a monetary problem. The function of Milton Friedman and the Chicago School is to make sure that people are confused and do not understand how the economy works. You want to produce students that end up like Paul Krugman, not people who understand what Radhika and I are taking.
You can say just as well that increased money creates deflation. How does this work? If most bank credit is created to increase the price of housing, to lend against houses and raise the price of housing, that is going to increase the amount of money that people have to pay for housing.
From 1945 to 1980, 25% of American income was what you would pay for a mortgage or for rent. Today it's up to 43%, guaranteed by the government and even higher for many people. If you have to raise the amount of your income from 25% to 43% to pay the banks for mortgage credit, you're going to have to cut back your spending on goods and services accordingly.
In the 1930s, this was called debt deflation. Everybody knew what it was. Irving Fisher wrote a great article on debt deflation. My book, Killing the Host, describes debt deflation. The banks try to say, no, no, money inflates the economy and our credit helps employ labor and raise wages, but when we create too much, meaning when wages go up, then we have to step it back down. The worst thing that can happen to an economy for a banker is for wages to go up. The banker wants wages to go down, so the banker wants all the money to be paid as interest in the economy.
Somehow they can turn everything upside down. What you get in the press and the politician speeches is an inside-out economics, not realizing that bank credit deflates the economy, causes unemployment, and that's how the Federal Reserve manages the banks to make sure that wages don't grow, that housing prices grow, that rents grow, that money paid to the banks grows, but not money paid to labor or to industry. Because if you had industrialization, if America was still a manufacturing economy, there would be higher employment for labor, and that's not what the class war is all about in a financialized economy.
MICHAEL HUDSON: As I said, should I repeat myself? You want to tax economic rent, not value. Value is created by labor. You don't want to tax labor, because if you tax labor, the employer has to pay a higher price, and if the price of labor is what determines what goods industrial products are sold for, the more you tax labor and the more you tax industry, then the less competitive you are in the world, and you lose out to countries like Asia or countries that are not post-industrialized, but continue to industrialize. That's basically it.
Interest is an element of cost. Debt service is an element of cost. If you have to pay higher interest, then, of course, this is the cost of production, and the American economy, by being taken over by the banks, has made itself so high-cost an economy that that is what has de-industrialized the economy. The only way that you can re-industrialize the economy is to prevent all of this unearned income, this free lunch income, the land rent, the interest charges, the monopoly rent. You want to prevent that from being subsidized by the politicians that are put in place by bank contributions so that all of this rent can be paid to the banks.
If there is unearned income, obviously some houses and some locations are going to be better. You want this to be the tax base. If it's the tax base, it's not going to be capitalized into higher prices.
MICHAEL HUDSON: Yes, a land tax primarily.
Also, you don't want to charge for student loans. You don't want students to say, OK, I want to get a job, I'll go to college, I'll pay $40,000 a year, and I'll come out owing so much money that I can't afford to buy a house and I can't afford to buy many of the goods and services I produce. They're not even producing many goods and services because those are basically industrial services and they've all been moved offshore.
It's not that foreign countries have stolen this industry. It's that America said we don't want industry that employs labor because you'd have too high employment and you'd have high labor prices and we're running the economy and we want the money, not labor. We bankers and monopolists and billionaires want all the money for ourselves, not labor. That's why we're moving it offshore to keep wages down because we want a low-wage economy. That's what we call an efficient economy, an economy where people can't afford higher education, an economy where people can't afford housing because they're paying us. They take out student loans that we get the money from. That's the kind of economy that economists say is efficient. Another word for it is race to the bottom, and that's the kind of economy we have.
MICHAEL HUDSON: Modern monetary theorists, as you know, say that it's not necessary to tax, that the government can simply create money without taxing. But even if the government could create money, there's a good reason for taxing. Some taxes are necessary because taxes prevent unearned wealth from being created.
For instance, here in New York, they spent a few billion dollars on extending the subway on the Upper East Side a few miles in a very high-rent, high-housing district where a lot of wealthy people live. When the subway was finally built along 2nd Avenue, housing prices and rents went up all along the line. So all of a sudden, the landlords got a free lunch. Radhika was just talking about landlords getting money for nothing. This is an example. They got a free lunch. The city could have said, OK, by building this subway line, we've created a much higher valuation for rents because people now don't have to walk so far to the subway and they're willing to pay for that. But instead, the transit authority raised the fares and stopped paying money to maintain the switches throughout the system. The system throughout all the rest of the city decayed. Fares went up, and the city did not recover this money from the absentee landlords who made a killing off the $2 billion that America paid.
You don't want people to make money that way. You don't want money to be taken by people who will then bribe the politicians or not bribing, but contribute to their political campaigns and mounting attack ads on their opponents and distort the economy. So the failure to tax economic rent, the failure to tax land rent and bank financial gains is you let a class develop whose economic interests are in fighting against the economy as a whole and turning the economy into getting wealth by unearned income, getting wealth by financial maneuvering and by rent-seeking, as economists say, not by actually producing labor and raising living standards, not by industry and improvements in productivity, but essentially not reinvesting in long-term development, research, and the kind of investment that the countries that are actually growing.
And if you look at what the Asian countries are doing, they're avoiding this. The Asian countries are doing exactly what Adam Smith, John Stuart Mill, Marx, and the other classical economists defined as a free market. America's going back towards the kind of 17th, 16th, 13th century. We're going back to feudalism, not moving out of it.
MICHAEL HUDSON: This is exactly what's happened in London. Now they can't afford to live there anymore.
MICHAEL HUDSON: Well, basically, speculation is a function of how much credit will the Federal Reserve let banks lend against. Donald Trump could buy huge swaths of real estate for putting down no money at all. And most of the private capital companies are able to say, here's a profitable company like Sears Roebuck, or Toys R Us, lend me the money to buy it, and I will pay you interest on it, and I'll buy it, and I will immediately essentially break it up into parts, sell it off, fire the labor force, squeeze labor more, and then leave a bankrupt shell, but you, the banker, and I can get rich off this. That's basically speculation.
Speculation is making money financially by dismantling an industrial economy. Speculation is taking over a company, borrowing money, using the money to pay out as dividends, using the money for stock buybacks. Speculation is when you buy a company and say, well, look at a company like Boeing. Why is this company spending so much money on engineering aircraft? Let's not develop a new aircraft. Let's just take the money that we're getting already and pay it out as dividends, make stock buybacks, pay it to ourselves, and of course the company is going to go bankrupt and end up crashing in time, but that's not our problem because we'll become billionaires by the end of that. We'll make the banks rich. We'll get rich. Who needs investments? Let's just run it all down to the ground.
The whole economy is looking like Boeing right now, and what they've done to Boeing, what they've done to General Electric has become the model of how to de-industrialize and wreck an economy. They call it speculation, but it's really debt leveraging. It's really loading a company down with debt and using its income to pay debt service, not to invest in new capital formation.
MICHAEL HUDSON: Well, you use the word market, and that people don't realize that every economy is some kind of a market. Ancient Babylonia had a market. Briggs and Rome had a market. China has a market. Even Stalinist Russia had a market. The question is, what kind of a market are you going to have? And what's the relation between prices and the cost of production? And who gets the income? Labor, capital, landlord?
And today, almost all the economists say a market is something where the bank, where the government doesn't do anything. It's a free market, meaning the billionaires control the economy. The government will not regulate them. The government will not try to steer credit to be productive. The government will not help the people. It will help the 1% exploit the people. A free market is an economy won by the 1% in an oligarchy where democracy has either no role to play, or if you let the people vote, they don't understand how the market works and how to create an economic alternative.
So what we're really talking about in this broadcast is, what kind of a market do you want to have? And where does finance fit into this market? Where does tax policy fit into this market? And how do you then create an alternative?
Well, any economist, Paul Krugman or the New York Times or the entire Council of Economic Advisers will say, with Margaret Thatcher, there is no alternative. But of course there's an alternative. And that's what our program is all about. Every few weeks, we're trying to outline an alternative that it doesn't have to be this way. Economists say it has to be this way if you want a free market, a free market for the 1% to take whatever they want, to control the banks, to control real estate, to create monopolies, and to extend this all throughout the world so that there's no country in the world that has a different kind of a market to show that there is an alternative. That's really the geopolitics of our analysis of how an economy works. And every economy is a market. The question is, do you want an oligarchic market, a democratic market, a productive market, an industrial market, or a financialized market?
MICHAEL HUDSON: Yes. Obviously, something like that should be used today. There are two alternatives. One is the International Monetary Fund special drawing rights. They created an artificial currency, and they did it because the United States said, we're running a budget deficit because we have 800 military bases all over the world, and we can't afford them. Give us enough money. But of course, you can't give us money. In order to give us money to have our military bases to control the world, to make sure there's no alternative to our kind of free market, you have to give other countries the ability to special drawing rights, too, so that the IMF can lend money to Argentina and the global south so that they can pay for the banks for the balance of payments deficit from following the kind of warped economic growth that the World Bank sponsors, privatization and dependency on American exports.
What we want is indeed an international currency to be used, but it's not going to be to enable debtor countries to pay the American and European banks. It's not going to be a currency to finance American military spending. It's going to be a currency that people will not have to keep their money in dollars anymore.
Imagine you're Saudi Arabia, and you'd say, we're getting a lot of pressure from our Palestinian population to support Gaza. But if we support Gaza and don't support the United States, they're going to grab all of the money that we keep in the United States. They're going to do to us what they did to Russia. The United States can grab any country's foreign reserves if they support a policy that the United States doesn't support militarily. We need an alternative that is not controlled by the American military and by the American neoconservatives.
Countries do need credit, just like the economy needs credit that we're urging should be created by the Treasury. What Keynes suggested is the equivalent of an international treasury, but that would lend money for the things that treasuries are supposed to create money for, to promote economic growth, not military spending, not trade dependency, and not a debt-ridden international economy, which is now breaking apart as a result of the last 75 years of IMF and World Bank lending.
MICHAEL HUDSON: Well, we've just solved the world's problem.
MICHAEL HUDSON: Well, these ideas that we've discussed were all discussed 75 years ago. And there were big political arguments about them. I've summarized them in Super Imperialism, a chapter on this. And the result of the way that the world economy was malstructured by rejecting Keynes' idea was the United States did not want to have economic balance. It wanted all the money for itself. The United States said, we're the world banker. What does a banker do? The banker impoverishes the rest of the economy to get rich. That's why you're a banker. And that's what we're going to do. We're going to create an economy, especially to the World Bank, through diplomacy, through military spending, and especially by regime change, so that raw materials prices go down. We're not only fighting labor, we're fighting the third world raw materials exporters. We're fighting the copper producers. We're fighting the agricultural producers of warm climate tropical crops that we import. We're fighting everybody who supplies us with what helps our economy so that we can get rich, not them. We can get rich in America and our satellites in Europe by keeping the global South poor, and by keeping Asia poor. There's not going to be any kind of bancor. There's not going to be any creditor responsibility for not monopolizing the world gains, because the economic system we want is all about monopolizing the world gains, and that's what the dollar standard has become.
All of this was foreseen 75 years ago, and because of America's power after World War II, it was able to establish this regressive, exploitative, unfair economic system that finally today, for the first time, the world is looking back at these principles and saying there is an alternative, while the United States educational system tries to convince economic students that there is no alternative, and the military and the neocons want to say, hey, if you got an alternative, we have some people who can take care of you and have a regime change.
The last working-class hero in England.
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